McDonald's did not make money in the first ten years of entering China, Chinese companies going global have no shortcuts: "burning money" to build the supply chain

"Some people say, if you don't go global, you'll be left behind. For many Chinese companies, if they don't seize this wave of going global, they will miss out on many opportunities." Zhou Zhaocheng, Vice Chairman of the Board of Directors of Haidilao International Holdings (06862.HK, hereinafter referred to as Haidilao), expressed such emotions at the 2024 Global Smart Logistics Summit. The restructuring of the global industrial chain, the development of digital infrastructure, and the highly competitive domestic market are driving Chinese companies towards the era of great navigation. For many Chinese companies, "going global" is gradually changing from an option to a necessity. However, going global means innovation, risk, and uncertainty. Joseph Tsai, Co-founder and Chairman of Alibaba Group, pointed out that globalization is not just about selling Chinese products globally or establishing cross-border e-commerce and logistics channels. The current global industrial layout is undergoing profound adjustments, with emerging manufacturing centers reshaping the relationship between production and consumption markets. As Chinese companies sail into the deep sea, how to truly achieve overseas localization development is a major issue. To go global, the supply chain leads the way 2023 is known as the first year of Chinese catering going global. Chinese catering brands such as Haidilao, Xiabu Xiabu, Zhuguangyu Hotpot, and Zhengxin Chicken Cutlet have opened stores overseas. According to institutional data, the overseas Chinese catering market is expected to reach a market size of nearly RMB 3 trillion by 2026. Zhou Zhaocheng used the phrase "prepare the horses and chariots before the troops move" to describe the importance of the supply chain in the process of going global, stating that "only by optimizing the supply chain to the extreme can the success of the entire process of going global be ensured." For Chinese cuisine to cross the oceans, it cannot bypass the harsh test of the supply chain. Zhou Zhaocheng pointed out that in the average cost structure of the catering industry, the cost of the supply chain or ingredients accounts for more than 40%. However, whether the supply of ingredients can be effectively transported, cleared through customs, and ensure the same standards and freshness as in China faces significant challenges. For example, Chinese cuisine's unique ingredients and seasonings are scarce and expensive overseas, while purchasing from China may face policy restrictions. In 2012, when Haidilao opened its first overseas store in Singapore, founder Daniel Zhang stated, "Internationalization is not our top priority, but standardization and institutionalization." Zhang admires two companies, one is McDonald's, and the other is the American catering supply chain company Sysco, both of which have excellent supply chain management. McDonald's entered the Chinese market in 1990, opening its first mainland McDonald's restaurant in Luohu, Shenzhen. Currently, it has nearly 6,200 stores in China. At the summit, Shi Yun, Vice President of McDonald's China Supply Chain, shared the story of "French fries" as an example of McDonald's entry into the Chinese market, stating, "When entering China, how to bring such high-quality French fries to consumers is a challenge for us." Shi Yun revealed that three to four years before the opening of the first store, McDonald's had been searching for a suitable base in China with suppliers to grow special potato varieties. It is understood that after spending several years in Inner Mongolia to grow them, McDonald's dared to use these potatoes to make French fries "Mcdonald's did not make a penny in the first ten years of entering the Chinese market, all profits were used to subsidize upstream suppliers and build our supply chain system, which will definitely provide some reference for outbound enterprises," Shi Yun said. Compared to international food giants such as Mcdonald's and KFC, which have deep roots in the domestic market, China's outbound food and beverage industry has only been around for just over a decade, and the local supply system is still under construction. As of June 30, 2024, Haidilao's international platform, Haidilao International (09658.HK), operates a total of 122 Haidilao restaurants overseas, adding 7 net new stores compared to the same period last year. This company achieved dual listings on the Hong Kong and US stock exchanges in May this year, with 10% of the net proceeds raised to be used for investment in supply chain management capabilities, such as building more central kitchens. By the end of 2023, Haidilao International had a total of 1615 suppliers overseas. Tea beverage company Chabaida also disclosed in its prospectus that it plans to use 5% of the IPO proceeds to support the supply chain capabilities in overseas markets. Globalization VS Localization Currently, Chinese companies' enthusiasm for going global is at an all-time high, but one major issue they still need to face is that the domestic ecosystem cannot be replicated as a whole overseas. "Some have achieved brand globalization, but management has not gone global; some have achieved product globalization, but consumption scenarios have not gone global, lacking an understanding of local consumers' mindset," Zhou Zhaocheng pointed out. Bian Xiaonan, founder of Weishic Capital, also emphasized the importance of localized operations. Weishic Capital has invested in Chinese e-commerce platforms such as Pinduoduo and SHEIN. "The core challenge of Chinese companies going global, especially the process of Chinese e-commerce going global, is 'Globalization' and 'Localization.' We have coined a new term 'Glocalization.'" Many outbound companies have mentioned the localization of talent management teams. Compared to the familiar domestic market, overseas markets have completely different market environments and constraints. A Chinese executive from an international shipping company bluntly stated at a meeting that many Chinese companies expect to instill successful management experiences or concepts into local employees, such as working hours and intensity, but they will face challenges from local laws and customs. At the same time, Chinese companies also need to be familiar with local partners to help them land faster and manage risks better. Zhou Zhaocheng also pointed out that in Haidilao's overseas development, great emphasis is placed on localization in management and operations. For example, in terms of talent management, nearly a quarter of the store managers in Haidilao's 122 overseas stores are now nationals of the host country. "Localization ultimately depends on how many local employees are hired in overseas stores and how many local customers are served." Bian Xiaonan revealed that the reason why the top e-commerce platforms invested by Weishic Capital have rapidly occupied overseas markets in countries such as Brazil and Mexico and achieved high growth and profitability in just three to four years is because they have built local teams covering production, supply, business development, and operations, with 90% of the entire on-site team being locals The process of decentralization is not easy. Bian Xiaoman bluntly stated that these Chinese e-commerce companies "have made tremendous efforts" to overcome many traditional management practices and resistance, fully decentralizing power to local teams, with "80% of the work being completely handed over to local teams to make decisions." The path for Chinese brands to become global enterprises is destined to be a process of "overturning" inherent experiences and models. As they venture overseas and enter a period of intense competition, it further tests the ability of enterprises to take root in foreign soil